Is FinTech Eating The Bank’s Lunch?

This paper investigates the impact of FinTech firms on the performance of traditional financial institutions (FIs). The existing literature reveals an ongoing debate on whether new FinTech firms act as complements or substitutes to traditional FIs. We examine this by utilizing a database that includes over 10,000 FIs and data on digital finance activities across 57 countries. Our findings support the substitution hypothesis, showing that FinTech presence reduces the profitability of incumbent FIs due to reduced interest margins and elevated costs. In response, banks attempt to adapt by extending loans and boosting non-interest income, however, these efforts are insufficient to fully offset the decline in profits. Our study also reveals that various FinTech business models, such as Peer-to-Peer (P2P) and Balance Sheet lending, have varying effects on cooperative versus large commercial banks, with the latter benefiting more from the evolving competitive landscape. The findings also suggest that FinTech presence has a greater adverse effect on FIs in countries with more inclusive, competitive, profitable, and developed financial systems. Interestingly, however, traditional FIs in countries with stronger regulatory frameworks appear to benefit from the expanding influence of FinTech firms.